CVR Energy, Inc. — 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a stand-alone fourth-quarter filing; selected Q4 figures are noted below. CVR Energy is a holding company with petroleum refining and nitrogen fertilizer segments. It owned approximately 66% of CVR Refining and 34% of CVR Partners; Icahn Enterprises and affiliates owned approximately 82% of CVR Energy.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Net sales | $5,988.4 million | $4,782.4 million |
| Operating income | $177.8 million | $90.9 million |
| Net income | $216.9 million | $8.9 million |
| Net income attributable to CVR Energy stockholders | $234.4 million; $2.70 per diluted share | $24.7 million; $0.28 per diluted share |
| Operating cash flow | $166.9 million | $267.5 million |
| Capital expenditures | $118.6 million | $132.7 million |
| Cash and cash equivalents at year-end | $481.8 million | $735.8 million |
| Working capital at year-end | $550.5 million | $749.6 million |
| Total debt, including current portion | $1,166.5 million | $1,164.6 million |
The 2017 income tax benefit was $216.9 million, including a $200.5 million benefit from remeasuring deferred tax liabilities after the Tax Cuts and Jobs Act reduced the federal rate to 21% beginning in 2018. Net income attributable to CVR Energy exceeded consolidated net income because of losses attributable to noncontrolling interests.
Petroleum segment sales were $5,664.2 million and operating income was $203.8 million, versus $4,431.3 million and $77.8 million in 2016. Refining margin was $11.50 per crude-oil throughput barrel, up from $9.27. Nitrogen fertilizer sales were $330.8 million and the segment recorded an operating loss of $9.2 million, versus sales of $356.3 million and operating income of $26.8 million in 2016.
For Q4 2017, net sales were $1,593.1 million, operating income was $30.0 million, and net income attributable to CVR Energy stockholders was $200.5 million, or $2.31 per share. The quarter included a $234.3 million income tax benefit and a $65.0 million net derivative loss.
Changes versus the prior comparable period
- Consolidated sales rose $1,206.0 million, primarily reflecting higher petroleum product prices and higher petroleum sales volumes. Petroleum operating income increased $126.0 million as refining margins improved.
- Higher crude costs, operating expenses and turnaround costs partly offset the petroleum improvement. Refining margin benefited from stronger product margins, while the crude-oil discount to WTI narrowed to $0.29 per barrel from $1.58 in 2016.
- Nitrogen fertilizer operating results weakened: average UAN price fell to $152 per ton from $177, and ammonia price to $280 from $376. Management attributed pressure to new U.S. supply, soft seasonal demand and delayed customer purchases.
- Operating cash flow declined $100.6 million. The 2017 cash balance also fell, with cash used in operating, investing and financing activities totaling $254.0 million net.
- Net derivative losses increased to $69.8 million from $19.4 million; interest expense increased to $110.1 million from $83.9 million, principally reflecting fertilizer-business borrowings and a full year of interest on the 2023 Notes.
Outlook, risks and unusual items
- Management outlook: Management stated that available cash, operating cash flows and existing credit facilities were expected to meet anticipated operating needs for at least the next 12 months, while noting that performance depends on market and other factors beyond its control. No formal earnings guidance was provided in the filing.
- Capital plans: 2018 capital spending was estimated at $231 million: $200 million petroleum, $21 million nitrogen fertilizer and $10 million corporate. The Coffeyville fertilizer facility planned a second-quarter 2018 turnaround estimated at $7 million, excluding lost-production effects. The second phase of Wynnewood’s refinery turnaround was expected in 2019, with estimated turnaround expenses of approximately $25 million.
- Renewable fuel compliance: 2017 RIN expense was approximately $249 million. Management estimated 2018 RIN costs at approximately $200 million based on then-current prices and assumptions; actual costs could vary materially. Regulatory uncertainty included a court remand of the EPA’s 2016 renewable-volume decision.
- Debt and liquidity: The principal notes were $500 million of 6.5% notes due 2022 and $645 million of 9.25% secured notes due 2023. As of February 20, 2018, reported revolver availability was $359.1 million for refining and $46.4 million for fertilizer, subject to borrowing-base limits. The fertilizer partnership’s fixed-charge coverage ratio was below the 1.75-to-1.0 threshold for unrestricted distributions under its 2023 Notes indenture; $72.7 million of the restricted-payment basket remained available at year-end.
- Key operating and market risks: Refining margins, crude differentials, RIN prices, pipeline access, outages and regional product demand are volatile. Fertilizer results are exposed to commodity prices, seasonal weather and demand, new domestic capacity, natural-gas and pet-coke costs, and third-party suppliers and transport.
- Contingencies and unusual exposures: Environmental remediation accruals were $3.9 million at year-end; estimated environmental payments were $4.0 million undiscounted through 2019. CVR disclosed an ongoing U.S. Attorney’s Office information request concerning RFS-related activities and Icahn’s advisory role; the filing said no claims or allegations had been made and CVR was cooperating. CVR also disclosed potential controlled-group liability for certain Icahn-affiliate pension plans, estimated to be underfunded by $423.7 million if terminated; CVR recorded no liability for this contingent exposure.
- Ownership and distributions: CVR paid $2.00 per share in 2017 dividends and declared a further $0.50-per-share Q4 dividend in February 2018. Dividend capacity depends on subsidiary distributions, market conditions and debt restrictions. The company was a controlled company and relied on NYSE governance exemptions.
Most important facts for investors to verify
- How much of 2017 earnings and Q4 EPS reflects the one-time $200.5 million tax remeasurement benefit, and what recurring earnings imply after that benefit.
- Whether refining margins and crude sourcing advantages persist, and the effect of the $64.3 million year-end net unrealized derivative liability and related open positions.
- Whether fertilizer pricing, volumes and operating performance recover amid new U.S. capacity, and whether the 2018 Coffeyville turnaround proceeds as planned.
- Actual RIN compliance costs versus the approximately $200 million 2018 estimate, and any change in EPA requirements or court proceedings.
- Subsidiary cash availability, distribution restrictions, borrowing-base headroom and capacity to fund debt service, capital spending and CVR Energy dividends.
- Developments in the RFS inquiry, environmental remediation and the disclosed contingent pension exposure tied to Icahn affiliates.
The filing’s financial statements received an unqualified audit opinion, and the auditor and management reported effective internal control over financial reporting as of December 31, 2017.